Calcutta High Court: Courts Empowered to Permit Award-Holder to Withdraw Security Deposited by Award-Debtor in Pending Challenge to Arbitral Award

Calcutta High Court: Courts Empowered to Permit Award-Holder to Withdraw Security Deposited by Award-Debtor in Pending Challenge to Arbitral Award

The Calcutta High Court by its single judge Justice Moushumi Bhattacharya has allowed an application filed by the State of West Bengal, as an award-holder in AP 808 of 2022, under the Arbitration and Conciliation Act, 1996 (in short 1996 Act) to withdraw a security of Rs. 9 crores furnished by BBM Enterprises (award debtor) in lieu of the arbitral award, during the pendency of setting aside proceedings on the impugned award, initiated by the award-debtor.

In the present case, an application for withdrawal of the security amount was initiated by the award-holder, in lieu of changed circumstances since the order of stay had been passed on 17 January, 2023.

The claim of withdrawal was resisted by the award-debtor based on the contentions that, firstly, there existed no provision under 1996 Act for allowing such a prayer and secondly, Court would have to come to a prima facie view on the award before passing such orders. It was also submitted that the present application could not be entertained as the stay application had already been disposed of by the court at an earlier date.

The Court firstly dealt with the issue that whether permitting an award-holder to withdraw the secured amount requires statutory sanction.

The Court opined that status of an award-holder is that of a decree holder Section 36(1). Section 36 of The Arbitration and Conciliation Act, 1996, makes an arbitral award final and binding on the parties and persons claiming with the only exception being under Section 36(2), which gave a Court the discretion to grant an order of stay, subject to Section 36(3) and a separate application made by the award-debtor for stay of the award.

The Court comparatively analyzed the pre and post-amendment changes in Section 36 of the 1996 Act, and opined that no specific sanction would be required in the present case, since under Section 36 post-amendment, the enforcement and setting aside of award had been ‘de-coupled’, and that under the current regime, the Court possessed discretionary power in interpreting Section 36(2) insofar as merely filing an application for stay of an arbitral award, would not be seen to tantamount to an order for setting aside or for stay.

It was observed, “The amendment brought in two significant changes. First, it decoupled enforcement and setting aside of an award by the opening words of section 36(2). Second, it gave a temporary leg-room to the award-debtor to apply for stay of the award subject to the discretion exercised by the Court.”

The Court discerned that the discretionary space of the Court would be apparent from section 36 (2) which sets the tone of the departure from the pre-amendment position in the clarification that mere filing of an application for stay shall not by itself render the award unenforceable unless the Court grants an order of stay of the Arbitral award.

Thus, the judge was of the view that the construction of section 36(2) as it stands today is in step with the power of the Court to permit an award holder to withdraw the money secured by the award-debtor. It is a step-in aid of and in keeping with the statutory intention of giving primacy to the finality of an arbitral award.

Averting to the present case, the Court noted that proceedings were initiated against the award-holder under section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002). The Court held that there would not be any specific statutory provision required for the same, as Sections 35 and 36 of the 1996 Act themselves provide for such orders to be passed in appropriate cases, where there had been a change of circumstances after the prayer for stay had been disposed of.

The Court affirmed that the award-debtor will not face any prejudice if the award-holder is permitted to withdraw the amount.

It was held that the prayer for withdrawal of security made by the award-holders, was in consonance with the 1996 Act, as amended in 2016. The Court noted that the only time that such a prayer would be refused, would be if the award-debtor was left without a remedy, which was not the case in the present circumstances due to the award-holder furnishing a bank guarantee of equivalent amount, which could be encashed in case the award-debtor succeeded in setting aside the award.

Moreover, the Court clarified that the object of the amendment in the Act in granting stay of an award cannot be to make the award-holder wait for an uncertain and indefinite period of time to enjoy the fruits of the award.

“This is particularly so where the award-holder proves its bona fides not only by way of bringing significant subsequent events to the Court but also undertakes to secure the award-debtor in the event the award is set aside,” added the Court.

In the present case, the Court noted that the award-holder had undertaken to replace the amount to be withdrawn by way of a bank guarantee of an equivalent amount.

The Court avowed that no inconceivable prejudice, whether immediate or in the future, would be caused to the award-debtor if the Award-debtor succeeds in setting aside of the Award.

Next, the Judge categorically stated that allowing the award-holder to withdraw the secured amount does not require prima facie finding.

The award-debtor’s argument on the prima facie case to be made out by the award-holder for the release of the money also impinges on the strict boundaries of a section 34 application for setting aside of an award, opined the Judge.

The Judge highlighted that the legality of the award can only be gone into in an application for setting aside of an award under section 34 of the Act. The Court is not required to go into the merits of the award for granting stay of the award under section 36(2), as opposed to prima facie finding on the award under the second proviso to section 36(3) of the Act.

Lastly, the Court asserted that separate application for withdrawal of security by award-holder is not required.

In the present case, the Court noted that the application for release of the secured amount to the award-holder was unconnected to the prayer for stay and was entirely different in cause and purpose.

“The award-holder must also show that intervention of events subsequent to the stay of the award calls for a decision as to whether the award-holder could be given some sort of interim relief in the form of withdrawing the secured amount. Thus, there must be a time gap between the two applications to allow the intervening facts to come in,” the Court avowed.

The Court appositely pointed out that while considering an application for stay of an award under section 36(2) does not lose hold over the question of enforcement of award since the question of stay is only an issue to be decided on a temporary basis - on the road to setting aside / enforcement of the award.

It was clarified by the Court that lis between the award-holder and the award-debtor continues until the award is given finality or is set aside by the Court. The continuation of the lis is substantially different, for instance, from a suit or a writ petition being disposed of by a Court and one of the parties thereafter coming to the Court with a fresh cause of action.

The present application was found to be maintainable and accordingly the Court permitted the award-holder to withdraw the amount of Rs. 9 crores upon furnishing a bank guarantee of an equivalent amount with the Registrar, Original Side.